OBBBA’s expanded home construction exception: What it means for builders

If you build homes or develop residential lots in St. George, Southern Utah, the greater Las Vegas or Phoenix metro areas, or anywhere across the Utah, Arizona, and Nevada tri-state region, the One Big Beautiful Bill Act just changed a rule that's been forcing builders into complicated tax accounting for decades. The home-construction exception to the percentage-of-completion method under IRC Section 460 has been expanded, and for contracts entered into after the law's enactment, more residential projects will qualify to skip percentage-of-completion entirely. That's a real opportunity for cash flow and tax timing, but only if you plan the method change before your 2026 contracts start locking you in.

This isn't a rule change you want to discover during tax season. Residential contractors and homebuilders across Utah, Arizona, and Nevada who wait until their CPA is preparing the 2026 return will have already signed contracts under the old assumptions, missed elections, and possibly locked themselves into percentage-of-completion for jobs that didn't need to be there.

What the home construction exception actually does

Under Section 460, most long-term contracts, meaning contracts not completed within the tax year they're started, have to use the percentage-of-completion method (PCM). PCM requires builders to recognize revenue and pay tax on income as a project progresses, based on costs incurred versus total estimated costs. That's fine for a commercial general contractor with steady cash draws. It's brutal for a homebuilder sitting on unsold spec inventory or waiting on a buyer's financing to close, because it can create a tax bill before the cash from the sale ever shows up.

The home construction exception has always let contracts meeting certain criteria, primarily that 80% or more of estimated costs relate to dwelling units in buildings with four or fewer units, use the completed contract method or another exempt method instead. Under the completed contract method, income and expenses aren't recognized until the project is substantially complete. For a builder financing land and construction costs out of pocket for 12 to 18 months before closing, that deferral can be the difference between a normal tax year and a cash crunch.

OBBBA widens who fits inside that exception. More residential projects, including certain multi-unit developments and projects that previously fell just outside the old thresholds, now qualify. The practical effect: builders who've been stuck using PCM because of a technicality in their old contracts may be able to shift eligible new contracts to completed contract accounting starting with agreements signed after the law took effect.

Why the 2026 contract date matters

The expanded exception applies to contracts entered into after enactment. For a calendar-year taxpayer, that means contracts signed in 2026 are squarely within the new rules, while contracts already in progress from 2024 or 2025 are generally stuck with whatever method applied when they were signed. That creates a clear planning window right now, not later.

Here's the trap: if a builder in St. George, Las Vegas, or the Phoenix metro signs a batch of new home contracts in January 2026 without revisiting their accounting method election, they may default into the same PCM treatment they've used for years, simply because nobody flagged that the contracts now qualify for an exemption. Method elections aren't automatic. They require an affirmative decision, and in some cases an IRS method change filing, to apply the new treatment correctly and consistently.

Method changes take more than a checkbox

Switching between percentage-of-completion and completed contract accounting is a change in accounting method, not just a different way of filling out a form. That generally means a Form 3115 filing, an analysis of any Section 481(a) adjustment, and a decision about whether the change applies only to new contracts or requires broader consistency across a builder's existing contract portfolio.

There's also the look-back method to consider. Contracts that stay on percentage-of-completion, or that were on PCM before shifting exempt status, may be subject to look-back interest calculations under the rules covered in the IRS Instructions for Form 8697. Builders who assume the new exception wipes out all prior look-back exposure are often wrong, and that's a costly assumption to make without checking.

Who benefits most from the expanded exception

The builders who stand to gain the most from this change share a few traits:

Builders working exclusively on custom homes under contract with a buyer from day one, where the home is essentially pre-sold, may see less benefit since income timing was already closer to cash timing. The exception matters most where there's a real gap between when costs are incurred and when cash from the sale arrives.

What Utah, Arizona, and Nevada builders should do before signing 2026 contracts

Start with a contract-level review, not a blanket policy change. Every job needs to be checked against the 80% cost threshold and unit-count rules to confirm it actually qualifies for the exception. Then decide, with your CPA, whether completed contract accounting genuinely improves your position, since deferring income also means deferring the ability to use losses or credits in the year costs are incurred. For builders with tight financing covenants tied to reported income, PCM may still be the better call even where the exemption is available.

We've walked residential contractors and construction business owners across St. George, Southern Utah, Nevada, and Arizona through WIP schedule rebuilds before, and the same discipline applies here: know your numbers by contract, not just in aggregate. Our team already prepares WIP schedules and percentage of completion accounting for builders across the tri-state region, and this law change is exactly the kind of shift that needs to run through that same job-costing detail before a method election gets filed.

If your business also carries retainage balances or seasonal cash gaps on top of this, it's worth reading how we help contractors plan around retainage tying up cash, since the two issues often compound each other during long construction cycles.

Common Questions

Does the expanded home construction exception apply to contracts already in progress?Generally no. The exception applies to contracts entered into after the law's enactment date, so most 2024 and 2025 contracts stay under whatever method applied when they were signed. New contracts signed in 2026 and later are where the expanded rules take effect for calendar-year taxpayers.

Is switching to completed contract method always better for cash flow?Not always. Completed contract accounting defers income recognition, which helps cash flow timing, but it also defers deductions and can affect financing covenants or bonding requirements that rely on reported income. A contract-by-contract review is the only way to know for sure.

Do we need to file anything with the IRS to change methods?In most cases, yes. A change between percentage-of-completion and completed contract method is treated as an accounting method change, which typically requires a Form 3115 filing and analysis of any required adjustment. This isn't something to handle with a simple internal policy memo.

How does this interact with the look-back method?Contracts that were or remain on percentage-of-completion may still trigger look-back interest calculations, detailed in the IRS Instructions for Form 8697. Moving future contracts to an exempt method doesn't automatically eliminate look-back exposure on prior jobs.

If you're a construction business owner or residential contractor in St. George, Southern Utah, Nevada, or Arizona signing contracts for 2026 or planning your next development phase, get this reviewed before the paperwork is final. Contact us by filling out the form below, and we'll walk through which of your contracts actually qualify for the expanded exception and what a method change would mean for your specific tax position.